Diamond's Departure

When President Obama nominated Peter Diamond to sit on the Federal Reserve Board of Governors fourteen months ago, those of us concerned with our economy's rampant unemployment met the announcement with open arms. Diamond, a professor at MIT, has spent his academic career studying the labor market. Six months after being tapped by the President, Diamond was awarded the Nobel Prize for his work on unemployment. Adding to his credentials is the fact that Federal Reserve Chairman, Ben Bernanke, studied under Diamond. In his doctoral dissertation, Bernanke thanked Diamond by name as one of his mentors who "gave generously of their time, reading and discussing my work." Being a Nobel Laureate and an influential professor of the Chairman of the Federal Reserve, however, did not impress Republicans in the Senate.

Since his nomination last April, Diamond's credentials were questioned by those in the Senate Banking Committee who claimed that that he did not possess the requisite knowledge or experience to sit on the Board of Governors. Most vocal was Senator Richard Shelby of Alabama, who referred to Diamond as merely an "old fashioned, big government Keynesian." Over the past thirteen months, Shelby and other Republicans on the Banking Committee have stymied efforts to confirm Diamond at every turn, and finally, the Professor had seen enough.

Today, Dr. Diamond penned an op-ed in the New York Times, where he declared that he would withdraw himself from the nomination process, and return to his academic career. In his piece, Diamond asserts that those who blocked his appointment politicized the confirmation process and exhibited a misunderstanding of the Federal Reserve's mandate. Under the Federal Reserve Act, established in 1913, the Board of Governors has the dual responsibility of achieving "maximum employment and stable prices." In other words, the Fed aims at keeping both unemployment and inflation low. Given the nations 9.1% unemployment rate and a core CPI under 1.5 one may expect the Federal Reserve, and the politicians who nominate the Board members, to be more concerned with gaining full employment than with the threat of future inflation. Instead, however, inflation has become Public Enemy Number 1, with the issue of protracted unemployment falling by the wayside. In Chairman Bernanke's historic first press conference back in April, for example, inflation concerns dominated the discussion.

This overemphasis on the threat of inflation at the expense of addressing mass unemployment, combined with claims that Diamond - an expert in employment - is unqualified to serve on the Federal Reserve, demonstrate that many in Washington do not fully understand the dual mandate of our nation's central bank. Today, we lost the opportunity to have a Federal Reserve Governor who is uniquely qualified to address the scourge of mass unemployment that our country faces. If those like Senator Shelby continue to block people like Professor Diamond from entering public service, they will do so at our nation's peril.